Friday, May 14, 2010

Near Term Game Plan

What a wild ride the past few weeks. Just a week ago Wednesday as the S&P hovered around 1170 I mentioned we needed to mind the gaps - one gap being nearly 50 S&P points lower and the next nearly 100%. I thought this would be an event that would take weeks (4-6 perhaps) to play out ... instead it happened the very next session. Then after a shock and awe Sunday night US style bailout by the Europeans a 4%+ gain open occurred Monday morning , which mostly benefited those who piled in late Friday (in an ugly market). That sort of bounce after a swoon would usually take 3-5 sessions to play out. Instead it happened in 1. It's a market on hyper drive.

Since then we've had 3 successive days where the S&P has brushed along its 50 day (simple) moving average, and rejected each of those days. Two of those days created late day selloffs (Tue & Thu) - however those who have been in markets for a while are confused what playbook to use. In the old school playbook it made sense to expect a rollover after such a huge drop, a cursory dead cat bounce and rise into resistance. But anyone playing that book in the past 15 months has been run over as technical resistance has been nothing to a market on a liquidity high. So I assume many, like I, have been simply watching from the side rather than shorting into these bounces into the 50 day simple moving average because we have recency bias. And the past 15 months has meant that shorting would lead to being steamrolled as resistance has been nothing more than a squiggly line on a chart that means nothing.

Yesterday's close put us essentially back to near where we were a week ago Thursday morning. Still over January 2010 highs of S&P 1150 but seemingly in trouble otherwise. Will old school technicals play out and a "retest" of recent lows actually happen? Or is this a near term headfake as another "V" shape bounce plays out? Once more 1150 should be of great interest, and this morning's premarket has danced all around this figure. Last week the flood gates opened once 1150 broke as there was no real support for many points lower. This time around even if you toss away the Thursday low and instead use Friday's (1110) there is still 40 S&P points of space if 1150 cannot hold.

Yet all this could have been mitigated if the S&P could of closed over 1174ish yesterday, rather than reverse and falter. Quite interesting how 1-2 hours worth of movement can change the whole complexion.

In terms of game plan, 1150 is definitely the pivot point for the day... any dunking of the index below that 15 minutes into the day once the premarket games are over, will be an invitation to short. Above 1150 and into 1174 it remains a 'white noise' area where not much is told to us. Above 1174 bull horns (on little volume) can be waved.

As for the portfolio, I'll continue the same path that has saved us from major selloffs time and again - if a stock breaks the 50 day moving average we'll at least cut back to reduce exposure. If this means we have to continue to flutter in and out of stocks while the greater market is in a tizzy so be it.


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